So I recently took in a bit of surgery to repair an old nasal injury. I spent the recovery time under the generous care of my parents. Along with mocking my inability to wrestle with him, my dad entertained me with introductory Economics lectures on video. (I’m embarrassingly ignorant of economics, and so was delighted by the opportunity.)
The instructor-on-DVD has lots of personality, almost to the point of condescension in the first couple lectures as he explains fairly basis concepts, such as the division of labour (the notion that 100 workers can get more done if they each take on a specialized task within a project, instead of each of them trying to build an entire car on their own). I was happy to have this straight-forward concept reviewed, but once it was emphasized with a tenth example, it started to become tedious.
Nevertheless, we proceeded to the lecture on “Supply and Demand,” where once again I was ready to boast that the concept was too simple to be continually reiterated. To my headache-provoking surprise, though, it is not as simple a notion as I had imagined.
In fact, I found it so confusing that I was forced to research it post-lecture. I enlisted the help of both internet and book (Economics Explained), but was baffled to discover that the particular part that was confusing me seemed to be only vaguely illuminated by each of my sources.
Eventually, after much mind-searching, the collected instruction of my resources overlapped to make sense to me (at least I think I’ve got it). And, I must admit, it’s actually a pretty neat model. So, for my fellow economic newbies (if there are any out there), I offer you the results of my study without the cost of research:
“Demand,” it turns out, is not simply, “How many do people want?” It is a relationship between price and quantity demanded. That is, given a certain price, how many do people want to buy? Today, then, we can graph the quantities demanded of autographed pictures of Seth at various prices. That demand graph, is the current demand which will arc upwards as prices go down (since more people want commodities when they’re cheaper).
But, tomorrow, if a rival Seth-paraphernalia seller comes along and offers autographed “with love” photos of Seth, the quantity demanded at every price for the original “non-loving” photos goes down, and so overall “Demand” for them will have gone down.
“Supply,” in turn, is not simply how many the sellers have of a certain item, but it is a relationship between the price and the quantity supplied. That is, given a certain price, how many Seth photos are supplied to the market by the makers of Seth photos? In this case, the higher the price, the more the sellers tend to want to supply (since that’ll make them more money), and so the “Supply” curve tends to arc upwards with price.
But if, Blog forbid, Seth’s nasal surgery went badly and harmed his looks, there may be fewer quality Seth photos available, and so the quantity supplied may go down at every price, meaning that overall “Supply” goes down.
THE FUN PART:
Now here’s the fun part: the Supply and Demand curves seem to work together to set a price in the market. If, that is, there are more people wanting an item at a certain price than there are items available, then the price of that item will go up.
For instance, let’s say that the price of Seth’s autobiography is set at only $100. The quantity demanded for that item at that price would likely then be around one billion. If, though, the quantity of books supplied is only 500 million, then the sellers can raise the price until the number of people still willing to buy matches the supply available.
In contrast, if there are fewer people wanting an item than there are supplied (at a particular price), price will go down.
For instance, the world’s worst movie, The Matrix, may supply 50 copies of itself at 25 cents each. But if only 10 people are willing to buy at that price then the price will start to drop until the number of copies available matches the number of confused people willing to buy them.
In both of the above cases, once the price of an item leads the quantity supplied to match the quantity demanded then we are in equilibrium. And the interesting aspect to an economic novice like myself is there is apparently a tendency of all products towards this equilibrium. The equilibrium will often be disrupted by outside factors (suddenly, let’s say, there is an interest in giving The Matrix as gag gifts), but the price will always then head back towards equilibrium given the new Demand.
I like it: the Market, it seems, will naturally figure out its own disagreements until it agrees with itself again.